Firm Performance and the Nature of Agency Problems in Insiders-controlled Firms: Evidence from Pakistan

Abstract

More than two centuries ago, Adam Smith (1776) showed skepticism about the efficiency of joint stock companies because of the separation of management from ownership. He observed that managers of joint stock companies cannot be expected to watch over the business with the same anxious vigilance as owners in a partnership would. Adam Smith’s worry remained buried for a century and a half until Berle and Means (1932) rekindled interest in this area when they hypothesised in their book that dispersed shareholding is an inefficient form of ownership structure. They argued that separation of ownership and management control has changed the role of owner from being active to the passive agent. Dispersed shareholders lack incentives to monitor self-interested managers who possess only a small fraction of the total shareholdings. The propositions by Adam Smith (1776) and Berle and Means (1932) received some support when Jensen and Meckling (1976) tied together the elements of property rights, agency costs, and finance to develop a theory of ownership structure of a firm. Jensen and Meckling asserted that agency costs are real, which the owner can reduce either by increasing ownership stake of the agent in the firm or by incurring monitoring and bonding costs. In early tests, several research studies supported the views of Jensen and Meckling. However, these studies did not account for endogeneity problem.

Impact of Excess Control, Ownership Structure and Corporate Governance on Firm Performance of Diversified Group Firms in Pakistan

“…5 The sample comprehensively covers almost all the non-financial sectors. In order to make our results comparable with earlier studies, the study excludes financial service firms like mutual funds, commercial and investment banks, insurance companies, etc., as well as government and foreign subsidiaries (Shah, 2009;Abdullah, Shah, Iqbal, & Gohar, 2011a;Abdullah, Shah & Khan, 2012;Arshad & Javid, 2014;Yousaf & Hasan, 2016). Group firms are defined on the basis of certain criteria including cross-ownerships and pyramids, cross-directorate-ships and social ties 6 .…”

Corporate Governance Mechanisms and Value Creation: An Empirical Evidence

“…Larger size of the board through resource enrichment theory enhance corporate value by instituting managerial effectively in corporate management [29]. The large size of the board has capacity to pragmatically supervise the activities of the management capable of improving corporate valuation [30]. The complexities in corporate management requires mixtures of expertise in the composition of the board for smooth operations and managerial control needed for value creation.…”

An empirical analysis of corporate governance and firm value: Evidence from KSE-100 Index

“…Van den Berghe and Levrau (2004) argued that resource enrichment theory favors the large board size that increases the value of firm because members have managerial talent and they perform their duties effectively. There is also a view point that large board size has more control on top management and directors can prudently monitor the management performance and duties, which will eventually increase the value of the firm (Abdullah et al, 2012). The advocates of large board size suggested that firms that are large in size and complex require more expertise of their directors.…”